Although Restrictive Covenants Can Potentially Reduce Moral Hazard,a Problem with Restrictive

question 44

Multiple Choice

Although restrictive covenants can potentially reduce moral hazard,a problem with restrictive covenants is that

• A)borrowers may find loopholes that make the covenants ineffective.
• B)they are inexpensive to monitor and enforce.
• C)too many resources may be devoted to monitoring and enforcing them,as debtholders duplicate others' monitoring and enforcement efforts.
• D)they reduce the value of the debt contract.

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Definitions:

Like-kind Exchange Requirements

Conditions that must be met for an exchange of property to qualify as tax-deferred under Section 1031 of the U.S. Internal Revenue Code.

Replacement Period

The time frame during which property must be replaced in order to defer recognition of capital gains or losses for tax purposes.

Involuntary Conversion

A forced exchange or loss of property through theft, destruction, or condemnation, with potential tax implications.

Depreciation Recapture

A tax provision that allows the IRS to collect taxes on any profitable sale of an asset that had previously benefited from tax deductions through depreciation.